How Unintended Consequences Could Trigger a Global Economic Collapse

The Jamal Khashoggi Affair Threatens Global Economic Collapse

The price of oil, which President Donald Trump has increasingly identified as a problem, could go much higher. And it could trigger a global economic collapse.

The all but confirmed assassination of a Saudi journalist and The Washington Post contributor in Istanbul, Turkey, has caused a significant problem for the U.S. administration and the Saudis themselves. Average people around the world are the ones who could end up paying.

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In 1914, the assassination of an archduke in Sarajevo sparked World War 1. In 2018, the assassination of a journalist in Turkey—possibly by a crown prince—could spark a global economic collapse.

It won’t be easy to quell the blowback of what may be the “black swan” event of a global economic collapse. U.S. Secretary of State Mike Pompeo flew to Riyadh to help manage a problem that would have ruined relations with just about any other country.

There’s no doubt that Pompeo, Crown Prince Mohammed bin Salman (MbS), and Saudi diplomats will reach a “Band-Aid” solution to help mitigate risks of a major embarrassment for Trump.

The U.S. president needs Saudi Arabia, the country he “graced” with his first official state visit, to complete an ambitious Middle East peace plan. Trump described it as no less than the “Deal of the Century.”

Still, evidence of the direct involvement of MbS in the “disappearance” of Jamal Khashoggi is strong, even if the Saudis are pulling their best make-believe efforts to find alternative solutions—otherwise known as scapegoats.

The Democrats could decide to use Saudi Arabia, and Trump’s links to it, to double down on the ongoing Russiagate investigation.

Oil as a Weapon for Economic Collapse?

The White House will feel the pressure to act, even if in a merely symbolic way such as to recall the U.S. ambassador to Riyadh. Yet, as MbS has shown, he doesn’t respond well to reprimands or suggestions, no matter how friendly.

Qatar and even everyone’s favorite prime minister, Canada’s Justin Trudeau, have already received a taste of MbS’s less-than-diplomatic methods.

That would kill Wall Street and cause economic collapse as global markets are already absorbing the shock of higher interest rates and U.S. trade tariffs.

There’s no way getting around it yet. Saudi Arabia remains crucially important for the world economy because it dominates the production of oil and the mechanisms that set its price.

Could Saudi Officials Really Spark a New Oil Crisis?

The Saudis have less power to cause an oil crisis because nobody wants oil to reach an excessively high price these days. A high oil price would encourage alternative energy investors and technologies to accelerate the development of alternatives—or go nuclear/natural gas.

It would also be a gift to Texas and Dakota oil producers, who need high oil prices to justify the expensive extraction techniques to develop shale oil and other unorthodox deposits.

This will take time, and economic collapse waits for nobody

In the short and medium term, the Saudis could cause problems, but China and others would find a way to work with Tehran at that point.

Alas, it’s a spring that would look much more like Syria (seven years (and counting) of brutal conflict) than it would Tunisia (a few weeks of protests leading to the president’s prompt resignation and exile…to Saudi Arabia).

The effects of a war in Saudi Arabia would cause the price of oil to spike to $300.00-400.00 per barrel. That’s beyond anything Saudi officials threatened. Economic collapse would occur overnight.

Economic Collapse Would Hit the U.S. Hardest

Apart from the impact of an oil price jolt, the United States has military contracts to think about. The Saudis spend a lot of riyals (or petrodollars, if you like) in the United States.

Saudi Arabia is one of the most important customers for U.S. weapon systems and civilian aircraft.

How Washington and Riyadh deal with the assassination and disappearance of Saudi journalist Jamal Khashoggi affects at least $110.0 billion worth of U.S. arms sales to the Kingdom of Saudi Arabia.

At risks are orders of tanks, combat ships, missile defense systems, and electronic warfare as well as radar systems.

In this case, the risk does not come from the Saudis. It comes from the U.S. Congress, which may decide to sanction or punish Saudi Arabia over the Khashoggi affair or what might be described as “Khashoggigate.”

And it’s nothing short of an obstacle to overcome for the markets, which are already grappling with tenser international relation in general.

Making America Great Again (MAGA) Needs Saudi Weapon Purchases

The escalation of tensions between the U.S. and Saudi Arabia could affect the Kingdom’s ability to attract foreign investors, fundamental to its economy and its market, which has also become part of the FTSE, Russell, and MSCI Emerging Market indices.

Should you worry? Of course, there’s nothing that’s entirely risk-free or certain in life and the markets. However, as I have noted often on Lombardi Letter, the defense companies, or defense stocks, have mechanisms in place to absorb even a risk such as Khassogigate poses.

Indeed, given the risks that the Saudis face, Trump could exact more military contracts—or “encourage” them to start fulfilling existing orders—from the Saudis through this ordeal.

Moreover, Turkey is also implicated, but as an offended party. It will no doubt demand some kind of reparations to ensure it remains a good NATO ally. The fact that the Saudi and Turkish governments continue to use diplomatic language sends a favorable signal.

Turkey is a close strategic ally to the U.S., which has strayed closer to Russia in the past few years because of the Syrian war in which both Saudis and Turks are implicated in backing fighters against Asad.

Sanctions Against Saudi Arabia or Gifts to Turkey?

Turkey can use the Khashoggi episode to reiterate its importance to Washington. It could do this by obfuscating the evidence just enough to allow the Saudis and MbS a way out (or a plausible explanation, like blaming the murder on dissident or overzealous agents acting beyond MbS’s orders).

Turkish President Erdogan will expect some favors in return from Washington and Ankara.

Those funds could go toward buying more U.S. American military hardware…perhaps?

The timing of the release of Pastor Andrew Brunson (the weekend of October 10) certainly suggests such a strategy.

Trump has threatened possible sanctions to Saudi Arabia if it were found that they were involved.

But he would rather such involvement were not found before a mid-term election.

That’s because his administration has befriended MbS since the outset. Trump favored Saudi Arabia over Qatar and of course Iran—which enjoyed more support from Obama, as the defunct Iran nuclear deal (JCPOA) suggests.

Trump and the U.S. military-industrial complex also need Saudis to remain a major buyer of U.S. hardware; especially after more reports of problems with Lockheed Martin Corporation’s (NYSE:LMT) “F-35s.”

On the contrary, the Saudis could, in the face of U.S. retaliation, buy “Su-35s” from Russia. And then there’s that little matter of the oil price.

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